But recent events have shown that large multinationals are far from immune to the problems that come with investing in China. On Jan. 18, for instance,
Caterpillar CAT -0.7686714448945674%Caterpillar Inc.U.S.: NYSEUSD95.53
-0.74-0.7686714448945674%
/Date(1481320811928-0600)/
Volume (Delayed 15m)
:
5233887AFTER HOURSUSD95.41
-0.12-0.12561499005547996%
Volume (Delayed 15m)
:
1316333
P/E Ratio
55.5406976744186Market Cap
56324975557.9215
Dividend Yield
3.224118078090652% Rev. per Employee
378363More quote details and news »CATinYour ValueYour ChangeShort position
(CAT) said it would write down the investment it made in
ERA Mining Machinery
(8043.Hong Kong), because of fraudulent accounting. Yum, meanwhile, was hit by allegations of toxic chicken at its KFC chain, which caused the stock to lose 5% during the past three months. And Bank of America sold down its stake in China Construction Bank for a nice profit but never got the foothold in China that it had hoped for.

The upshot: Investors who believe in China's long-term growth story should invest in China itself and not its proxies, says Marten Hoekstra, CEO of Emerging Global Advisors. "Developed-market-based multinationals will be challenged there," he says. "And Chinese companies will be more likely to succeed."

Some argue that loading up on companies with large revenue exposure to China gives investors the best of both worlds—the safety of the U.S. with the high growth of China. Yet that isn't always the case. In the past year, a basket of companies with exposure to China have gained just 7.8%, including reinvested dividends, according to Bloomberg data, far less than the 17.7% returned by the MSCI China Index and the 16.2% return of the Standard & Poor's 500 index.

"If you're 65 and have exposure through the S&P 500, you will benefit from China," says Todd Henry, an emerging-markets equity portfolio specialist at T. Rowe Price. For younger investors, he says, "I think it's shortsighted."

China's accounting still leaves much to be desired, but there are rules of thumb that can help weed out potential problems. Investors should avoid companies without long track records, says Richard Gao, portfolio manager of the $2.1 billion
Matthews China Fund
(MCHFX), who recommends at least three years of history. And the shorter the track record, the more due diligence required: "You have to look at whether management has been able to deliver what they promised in the past," Gao says.

Investors should also avoid getting too excited about any single stock, Henry says. That's because China's companies enjoy advantages such as high economic growth rates, which can make just about any stock look like a buy. Henry's recommendation: "Spend a lot of time looking for reasons you don't want to own a company," he says.